Kraft Heinz Co. — Q1 2021 Form 10-Q Summary
Business context and reporting period
The Kraft Heinz Company manufactures and markets food and beverage products globally across the United States, International, and Canada segments. The filing covers the three months ended March 27, 2021, compared with the three months ended March 28, 2020. Results remained affected by COVID-19, including elevated retail demand and weaker foodservice demand.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $6.394 billion | $6.157 billion | +3.9% |
| Organic net sales | $6.308 billion | $6.151 billion | +2.5% |
| Gross profit | $2.201 billion | $1.858 billion | +18.5% |
| Operating income | $1.089 billion | $770 million | +41.3% |
| Net income attributable to common shareholders | $563 million | $378 million | +48.9% |
| Diluted EPS | $0.46 | $0.31 | +48.4% |
| Adjusted EBITDA | $1.580 billion | $1.415 billion | +11.6% |
| Adjusted EPS | $0.72 | $0.58 | +24.1% |
| Operating cash flow | $810 million | $212 million | +$598 million |
Gross margin increased to approximately 34.4% from 30.2%, while operating margin increased to approximately 17.0% from 12.5%. Reported results included a $230 million non-cash goodwill impairment charge related to the planned nuts divestiture and an $18 million restructuring charge.
Sales growth reflected higher pricing of 1.5 percentage points, favorable volume/mix of 1.0 percentage point, and a 1.4 percentage-point benefit from foreign currency. Segment sales were $4.608 billion in the United States, $1.394 billion International, and $392 million in Canada. Segment Adjusted EBITDA increased 5.8% in the United States, 15.5% International, and 57.4% in Canada.
Cash flow, debt, and liquidity
- Cash and cash equivalents declined to $2.360 billion from $3.417 billion at December 26, 2020, primarily because of debt repayments, the debt tender offer, dividends, and capital expenditures.
- Operating cash flow was $810 million; capital expenditures were $227 million. Management expects approximately $900 million of capital expenditures in 2021, although the estimate may change because of COVID-19.
- Financing cash outflows were $1.643 billion, including $1.014 billion of long-term debt repayments, $103 million of debt prepayment and extinguishment costs, and $489 million of dividends paid.
- Long-term debt, including the current portion, was $27.2 billion at March 27, 2021, compared with $28.3 billion at year-end 2020. Total debt had a carrying value of approximately $27.2 billion and a fair value of $30.4 billion.
- The company had no borrowings under its $4.1 billion revolving credit facility at quarter-end and remained in compliance with financial covenants. Following an April 2021 extension, commitments are scheduled to remain available at $4.0 billion through July 2025, subject to facility terms.
- Credit ratings were BB+ from Fitch and S&P and Baa3 from Moody’s. Management stated that operating cash flow and available credit should provide sufficient liquidity for the next 12 months.
Material changes versus the prior comparable period
- Net sales increased 3.9%, while organic net sales increased 2.5%, driven by pricing and favorable volume/mix.
- Profitability improved substantially, despite the current-period $230 million goodwill impairment, primarily due to higher organic sales, favorable commodity costs, lower corporate expenses, and a favorable comparison in unrealized commodity hedge results.
- Interest expense increased to $415 million from $310 million, primarily because of a $106 million loss on extinguishment of debt associated with the February 2021 tender offer.
- Operating cash flow improved materially from $212 million to $810 million, partly due to working-capital timing and stronger earnings.
- The company completed a tender offer that reduced outstanding senior notes by approximately $900 million in principal amount and repaid $111 million of notes at maturity.
- Assets held for sale increased to $5.264 billion from $1.863 billion, primarily because the nuts business was classified as held for sale.
Guidance, outlook, risks, and unusual items
- Management did not provide a clear full-year revenue or earnings guidance figure in the filing. It expects approximately $900 million of 2021 capital expenditures.
- The planned sale of the global nuts business to Hormel is expected to close in Q2 2021 for approximately $3.4 billion of consideration, subject to customary closing conditions. The company recorded a $230 million goodwill impairment and an estimated $19 million pre-tax loss on sale.
- The planned cheese transaction with Lactalis, involving approximately $3.3 billion of consideration, is expected to close in the second half of 2021, subject to regulatory and other conditions. The company may recognize additional impairment or a gain or loss on sale at closing.
- COVID-19 continued to support retail demand but negatively affected foodservice. Management expects volatility in away-from-home demand through Q2 2021 and potentially beyond.
- Goodwill and brand balances remain substantial: $31.4 billion of goodwill and $40.8 billion of indefinite-lived intangible assets. Several reporting units and brands have limited valuation cushion and remain exposed to future impairment if growth, margins, discount rates, foreign exchange, or consumer trends deteriorate.
- The company remains subject to SEC subpoenas and a related U.S. Attorney’s Office review involving procurement, financial reporting, internal controls, debt issuances, impairments, incentive plans, and disclosures. The potential outcome and financial impact cannot currently be predicted.
- Pending securities, ERISA, and shareholder derivative lawsuits remain at an early stage; the company cannot reasonably estimate any potential loss.
- The Board declared a quarterly dividend of $0.40 per share payable June 25, 2021. The filing does not identify a publicly announced share repurchase program.
Most important facts for investors to verify
- Timing, proceeds, regulatory approvals, and final accounting for the nuts and cheese divestitures.
- Whether retail demand normalizes or reverses as pandemic-related purchasing patterns fade, and the pace of foodservice recovery.
- Progress on debt reduction, including the May 2021 redemption of $447 million of 4.000% senior notes due 2023.
- Future goodwill and brand impairment exposure, particularly for reporting units and brands with 20% or less valuation cushion.
- Developments and possible financial consequences of the SEC investigation and related litigation.
- Actual 2021 capital expenditures, operating cash flow, commodity costs, and the company’s ability to sustain its dividend while reducing debt.